The link between Facebook and cigarettes
What about cigarettes made for such successful stocks?
They sell for dollars, cost cents to make, and are addictive too!
Facebook is the leading cigarette manufacturer of the digital era.
Image: flick commons, mkhmarketing
Let’s rewind and try bed ourselves back in earlier times. Back before there were ads on Facebook.
It was MySpace’s cooler, more handsome, older brother. But underneath the social, all your college friends are on it, hook, the business was still a website.
When they introduced adverts, they did what everyone did and put display ads around the page. At this point in time, Facebook was simply AOL: A walled garden where they served you banner ads. As Yahoo has shown, banner ads are a circumscribed business model.
If there is one reason Facebook might, and this is still unproven, might be a better investment than Google, it is mobile.
The iPhone happens, Android happens, and more and more people start using Facebook and Google on their smartphone.
Google is obliged to show you less adverts on a smaller screen. Otherwise it puts people off.
Facebook was obliged to leave out display ads and put adverts directly into your news feed. This turned out to be the best thing that could have ever happened to them.
At first Zuckerberg et al were incredibly scared about putting off users, but after much testing they discovered people just sucked up the ads. They are yet to find the level that stops users scrolling down their news feed. They are yet to find a level where they stop making more money from their users.
Facebook ran a test, where they disabled people’s smartphone app, to see how long before people stopped opening the thing.
Never. People didn’t stop. They might log in through the browser as well. But they kept trying the app.
How Facebook makes money: the Equations
Monthly average users (MAU) * average revenue per user per month (ARPU)
Where average revenue per user is:
Number of news feed items viewed in a month (think of it as the time a user spends on Facebook) * ad load * dollars per ad
Across October to December of 2015, Facebook had 1.59bn monthly average users, and average revenue per user of $3.67. This worked out at $5.8bn in revenues. Quadruple this to get an annualized run rate.
Facebook’s business model is your time. They are churning you and your friend’s content back at you, and letting you inhale as much as you can.
At the same time, it has crept quietly into the center of the media industry. According to Pew 71% of adult American Internet users are on Facebook, and they love to share and read content.
Outside of America, users in India, China and Brazil are still growing rapidly. In India alone it has 125m users, indicating a long runway of growth in these markets.
Some will dislike my comparison with cigarette stocks.
Firstly, remember the fact that cigarettes can kill you is a side effect, if the cigarette companies could have separated that out they would have. It was most definitely not part of their business model and if anything, the biggest let down of this industry was it did not figure out a way to stop cigarettes killing you.
Killing the customer is a terrible business characteristic.
Secondly, Facebook have hired many of the cleverest artificial intelligence specialists on the planet. They are investing in state of the art machine learning. Most of their time is spent writing AI that figures out how to make your news feed more addictive.
Think endless scroll. Think leaving out friends you consider dull. Think identifying friends you have a crush on.
Now, imagine all the advances related to Lee Sedol’s defeat at Go being applied, both at Google and at Facebook, to ensuring your next move is another flick on a screen that they own.
Facebook’s revenue recipe
- Create a place where friends can proudly share content with each other
- Present this content in an ever more addictive way
- Lace this content with paid for advertising
The good news is they have no wish to compromise your privacy. Unnecessary negatives are bad for business. They just want to use your private thoughts to get you to invest more time in scrolling!
When Facebook invests in Instagram, Whatsapp or Occulus Rift, they are trying to identify how you are going to spend your time going forward. They are pretty good at this too, even if the money they pay is eye watering.
Google is at its heart finding out what you are going to buy. Amazon is a platform for you to buy things. Facebook is selling your addiction.
This article originally appeared here. Don’t go there though, you have just read it!
My blog is HowDoesItMakeMoney.com, check it out for more insights such as why AirBnB is not part of the sharing economy and how Twitter is the Fox News of the internet.
